Single Candlestick Pattern - Paper Umbrella - Technical Analysis

Today we are going to discuss about Paper Umbrella . In the last post we discuss about spinning top and doji .

Paper Umbrella :

The paper umbrella is a single candlestick pattern which helps traders in setting up directional trades. The interpretation of the paper umbrella changes based on where it appears on the chart.

A paper umbrella consists of two trend reversal patterns namely the hanging man and the hammer. The hanging man pattern is bearish and the hammer pattern is relatively bullish. A paper umbrella is characterized by a long lower shadow with a small upper body.

If the paper umbrella appears at the bottom end of a downward rally, it is called

the ‘Hammer’.

If the paper umbrella appears at the top end of an uptrend rally, it is called the ‘Hanging man’.

To qualify a candle as a paper umbrella, the length of the lower shadow should be at least twice the length of the real body. This is called the ‘shadow to real body ratio’.

Let us look at this example: Open = 100, High = 103, Low = 94, Close = 102 (bullish candle).

Here, the length of the real body is Close – Open i.e 102-100 = 2 and the length of the lower shadow is Open – Low i.e 100 – 94 = 6. As the length of the lower shadow is more than twice of the length of the real body; hence we can conclude that a paper umbrella has formed.

The Hammer formation :

The bullish hammer is a significant candlestick pattern that occurs at the bottom of the trend. A hammer consists of a small real body at the upper end of the trading range with a long lower shadow. The longer the lower shadow the more bullish the pattern.

The chart below shows the presence of two hammers formed at the bottom of a

down trend.

Notice the blue hammer has a very tiny upper shadow, which is acceptable considering the “Be flexible – quantify and verify” rule . 

A hammer can be of any color as it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. However, it is slightly more comforting to see a blue colored real body.

The prior trend for the hammer should be a down trend. The prior trend is highlighted with the curved line. The thought process behind a hammer is as follows:

1. The market is in a down trend, where the bears are in absolute control of the markets

2. During a downtrend, every day the market would open lower compared to the

previous day’s close and again closes lower to form a new low

3. On the day the hammer pattern forms, the market as expected trades lower, and makes a new low

4. However at the low point, there is some amount of buying interest that emerges, which pushes the prices higher to the extent that the stock closes near the high point of the day

5. The price action on the hammer formation day indicates that the bulls attempted to break the prices from falling further, and were reasonably successful

6. This action by the bulls has the potential to change the sentiment in the stock, hence one should look at buying opportunities

The trade setup for the hammer is as follows:

A hammer formation suggests a long trade

The trader’s entry time depends on the risk appetite of the trader. If the trader is a risk taker, he can buy the stock the same day. Remember, the color of the real body in hammer does not matter; hence there is no violation to the Rule 1. If the trader is risk averse, he can buy the stock the day after the pattern has formed only after ensuring that the day is a blue candle day

Risk takers can qualify the day as a hammer by checking the following condition at 3:20PM on the hammer day..

Open and close should be almost the same (within 1-2% range)

Lower shadow length should be at least twice the length of real body

If both these conditions are met, then the pattern is a hammer and the risk taker can go long

The risk averse trader should evaluate the OHLC data on the 2nd If it’s a blue candle, the trade is valid and hence he can go long

The low of the hammer acts as the stoploss for the trade

The chart below shows the formation of a hammer where both the risk taker and the risk averse would have set up a profitable trade. This is a 15 minutes intraday chart of Cipla Ltd.

The trade set up would be as follows:

Buy Price for a risk taker – He takes the trade on the Hammer candle itself at –

Rs.444/-

Buy price for a risk averse – He takes the trade on the next candle after evaluating that the candle is blue at – Rs. 445.4/-

Stoploss for both the traders is at Rs.441.5/-, which is the low of the hammer formation.

Do notice how the trade has evolved, yielding a desirable intraday profit.

Here is another chart where the risk averse trader would have benefited by virtue of the ‘Buy strength and Sell weakness’ rule.

Here is another interesting chart with two hammer formation.

Both the hammers qualified on the pre conditions of a hammer i.e :

1. Prior trend to be a down trend

2. Shadow to real body ratio

On the first hammer, the risk averse trader would have saved himself from a loss making trade, thanks to Rule 1 of candlesticks. However, the second hammer would have enticed both the risk averse and risk taker to enter a trade. After initiating the trade, the stock did not move up, it stayed nearly flat and cracked down eventually.

Please note once you initiate the trade you stay in it until either the stop loss or the target is reached. You should not tweak the trade until one of these events occurs. The loss in this particular trade (first hammer) is inevitable. But remember this is a calculated risk and not a mere speculative risk.

Here is another chart where a perfect hammer appears, however it does not satisfy the prior trend condition and hence it is not defined pattern.

The Hanging man :

If a paper umbrella appears at the top end of a trend, it is called a Hanging man. The bearish hanging man is a single candlestick, and a top reversal pattern. A hanging man signals a market high. The hanging man is classified as a hanging man only if is preceded by an uptrend. Since the hanging man is seen after a high, the bearish hanging man pattern signals selling pressure.

A hanging man can be of any color and it does not really matter as long as it qualifies ‘the shadow to real body’ ratio. The prior trend for the hanging man should be an uptrend, as highlighted by the curved line in the chart above. The thought process behind a hanging man is as follows:

1. The market is in an uptrend, hence the bulls are in absolute control

2. The market is characterized by new highs and higher lows

3. The day the hanging man pattern appears, the bears have managed to make an entry

4. This is emphasized by a long lower shadow of the hanging man

5. The entry of bears signifies that they are trying to break the strong hold of the bulls

Thus, the hanging man makes a case for shorting the stock. The trade set up would be as follows:

1. For the risk taker, a short trade can be initiated the same day around the closing price

2. For the risk averse, a short trade can be initiated at the close of the next day after ensuring that a red candle would appear

The method to validate the candle for the risk averse, and risk taker is exactly the same as explained in the case of a hammer pattern

Once the short has been initiated, the high of the candle works as a stoploss for the trade.

In the chart above, BPCL Limited has formed a hanging man at 593. The OHLC details are –

Open = 592, High = 593.75, Low = 587, Close = 593. Based on this, the trade set up would be as follows:

o The risk taker, initiates the short trade on the day the pattern appears (at 593)

o The risk averse, initiates the short trade on the next day at closing prices after

ensuring it is a red candle day

o Both the risk taker and the risk averse would have initiated their respective trades

o The stoploss price for this trade would be the high price i.e above 593.75 The trade would have been profitable for both the risk types.

Experience with a paper umbrella :

While both the hammer and the hanging man are valid candlestick patterns, my dependence on a hammer is a little more as opposed to a hanging man. All else equal, if there were two trading opportunities in the market, one based on hammer and the other based on hanging man I would prefer to place my money on hammer. The reason to do so is simply based on my experience in trading with both the patterns.

My only concern with a hanging man is the fact that if the bears were indeed influential during the day, why did the price go up after making a low? This according to me re establishes the bull’s supremacy in the market.

I would encourage you to develop your own thesis based on observations that you make in the markets. This will not only help you calibrate your trade more accurately but also help you develop structured market thinking.

Conclusion Of Paper Umbrella :

1. A paper umbrella has a long lower shadow and a small real body. The lower shadow and the real body should maintain the ‘shadow to real body’ ratio. In case of the paper umbrella the lower shadow should be at least twice the length of the real body

2. Since the open and close prices are close to each other, the color of the paper

umbrella should not matter

3. If a paper umbrella appears at the bottom of a down trend, it is called the ‘hammer’

4. If the paper umbrella appears at the top end of an uptrend, it is called the hanging man

5. The hammer is a bullish pattern and one should look at buying opportunities when it appears

6. The low of the hammer acts as the stop loss price trade

7. The hanging man is a bearish pattern which appears at the top end of the trend, one should look at selling opportunities when it appears

8. The high of the hanging man acts as the stop loss price for the trade

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Single Candlestick Patterns - Spinning Top and Doji - Technical Analysis

In the last post we discuss about Marubozu . In this post we discuss about Spinning top and Doji .

Spinning Top :

The spinning top is a very interesting candlestick. Unlike the Marubuzo, it does not give the trader a trading signal with specific entry or an exit point. However the spinning top gives out useful information with regard to the current situation in the market. The trader can use this information to position himself in the market.

A spinning top looks like the candle shown below. Take a good look at the candle. What observations do you make with regard to the structure of the candle?

Two things are quite prominent…

o The candles have a small real body

o The upper and lower shadow are almost equal

What do you think would have transpired during the day that leads to the creation of a spinning top? On the face of it, the spinning top looks like a humble candle with a small real body, but in reality there were a few dramatic events which took place during the day.

Let us follow these events:

Small real body :

This indicates that the open price and close price are quite close to each other. For instance the open could be 210 and the close could be 213. Or the open could be 210 and close at 207. Both these situations lead to the creation of a small real body because a 3 point move on a 200 Rupee stock is not much. Because the open and close price points are nearby to one another, the color of the candle does not really matter. It could be a blue or a red candle, what really matters is the fact that the open prices and close prices are near to one another.

The upper shadow :

The upper shadow connects the real body to the high point of the day. If it is a red candle, the high and open are connected. If it is blue candle, the high and close are connected. If you think about the real body in conjunction with the upper shadow ignoring the lower shadow what do you think had happened? The presence of the upper shadow tells us that the bulls did attempt to take the market higher. However they were not really successful in their endeavor. If the bulls were truly successful, then the real body would have been a long blue candle and not really a short candle. Hence this can be treated as an attempt by the bulls to take the markets higher but they were not really successful at it.

The lower shadow :

The lower shadow connects the real body to the low point of the day. If it is a red candle, the low and close are connected. If it is a blue candle, the low and open are connected. If you think about the real body in conjunction with the lower shadow ignoring the upper shadow what do you think had happened? This is pretty much the same thing that happened with the bulls. The presence of the lower shadow tells us that the bears did attempt to take the market lower. However they were not really successful in their endeavor. If the bears were truly successful, then the real body would have been long red candle and not really a short candle. Hence this can be treated as an attempt by the bears to take the markets lower but they were not really successful.

Now think about the spinning top as a whole along with all its components i.e real body, upper shadow, and lower shadow. The bulls made a futile attempt to take the market higher. The bears tried to take the markets lower and it did not work either. Neither the bulls nor the bears were able to establish any influence on the market as this is evident with the small real body. Thus Spinning tops are indicative of a market where indecision and uncertainty prevails.

If you look at a spinning top in isolation it does not mean much. It just conveys indecision as both bulls and bears were not able to influence the markets. However when you see the spinning top with respect to the trend in the chart it gives out a really powerful message based on which you can position your stance in the markets.

Spinning tops in a downtrend :

What if the spinning tops were to occur when the stock is in a down trend?

In a down trend, the bears are in absolute control as they manage to grind the prices lower. With the spinning top in the down trend the bears could be consolidating their position before resuming another bout of selling. Also, the bulls have attempted to arrest the price fall and have tried to hold on to their position, though not successfully. After all, if they were successful the day would have resulted in a good blue candle and not really a spinning top.

So what stance would you take considering that there are spinning tops in a down trend. The stance depends on what we expect going forward. Clearly there are two foreseeable situations with an equal probability:

1. Either there will be another round of selling

2. Or the markets could reverse its directions and the prices could increase Clearly, with no clarity on what is likely to happen, the trader needs to be prepared for both the situations i.e reversal and continuation.

If the trader has been waiting for an opportunity to go long on the stock, probably this could be his opportunity to do so. However to play safe he could test the waters with only half the quantity. If the trader wants to buy 500 shares, he could probably enter the trade with 250 shares and could wait and watch the market. If the market reverses its direction, and the prices indeed start going up then the trader can average up by buying again. If the prices reverse; most likely the trader would have bought the stocks at the lowest prices.

If the stock starts to fall, the trader can exit the trade and book a loss. At least the loss is just on half the quantity and not really on the entire quantity.

Here is a chart, which shows the downtrend followed by a set of spinning tops. The stock rallied post the occurrence of the spinning top.

Here is another chart which shows the continuation of a down trend after the occurrence of spinning tops.

So, think about the spinning top as “The calm before the storm”. The storm could be in the form of a continuation or a reversal of the trend. In which way the price will eventually move is not certain, however what is certain is the movement itself. One needs to be prepared for both the situations.

Spinning tops in an uptrend :

A spinning top in an uptrend has similar implications as the spinning top in a down trend, except that we look at it slightly differently. Look at the chart below, what can you see and what would be the inference?

An obvious observation is the fact that there is an uptrend in the market, which implies the bulls have been in absolute control over the last few trading sessions. However with the occurrence of the recent spinning tops the situation is a bit tricky:

1. The bulls are no longer in control, if they were, spinning tops would not be form on the charts

2. With the formation of spinning tops, the bears have made an entry to the markets. Though not successful, but the emphasis is on the fact that the bulls gave a leeway to bears

Having observed the above, what does it actually mean and how do you position

yourself in the market?

1. The spinning top basically conveys indecision in the market i.e neither the bulls nor the bears are able to influence the markets.

2. Placing the above fact in the context of an uptrend we can conclude two things..

(I) The bulls could be consolidating their position before initiating another leg of up move

(II) Or the bulls are fatigued and may give way to bears. Hence a correction could be around the corner.

3. The chances of both these events taking place is equal i.e 50%

Having said that, what should you do? The chances of both events playing out are equal, how are you going to take a stance? Well, in such a situation you should prepare for both the outcomes!

Assume you had bought the stock before the rally started; this could be your chance to book some profits. However, you do not book profits on the entire quantity. Assume you own 500 shares; you can use this opportunity to book profits on 50% of your holding i.e 250 shares. Two things can happen after you do this:

1. The bears make an entry – When this happens the market starts to slide down, and as you have booked 50% profits at a higher price, and can now choose to book profits on the balance 50% as well. Your net selling price will anyway be higher than the current market price.

2. The bulls make an entry – It turns out that the bulls were indeed taking a pause and the rally continues, at least you are not completely out of the market as you still have the balance 50% of your holdings invested in the markets

The stance you take helps you tackle both the outcomes.

Here is a chart which shows an uptrend and after the occurrence of spinning tops, the stock rallied. By being invested 50%, you can continue to ride the rally.

To sum up, the spinning top candle shows confusion and indecision in the market with an equal probability of reversal or continuation. Until the situation becomes clear the traders should be cautious and they should minimize their position size.

Dojis :

The Doji’s are very similar to the spinning tops, except that it does not have a real body at all. This means the open and close prices are equal. Doji’s provide crucial information about the market sentiments and is an important candlestick pattern.

The classic definition of a doji suggests that the open price should be equal to the close price with virtually a non existant real body. The upper and lower wicks can be of any length.

However keeping in mind the 2nd rule i.e ‘be flexible, verify and quantify’ even if there is a wafer thin body, the candle can be considered as a doji.

Obviously the color of the candle does not matter in case of a wafer thin real body. What matters is the fact that the open and close prices were very close to each other.

The Dojis have similar implications as the spinning top. Whatever we learnt for spinning tops applies to Dojis as well. In fact more often than not, the dojis and spinning tops appear in a cluster indicating indecision in the market.

Have a look at the chart below, where the dojis appear in a downtrend indicating indecision in the market before the next big move.

Here is another chart where the doji appears after a healthy up trend after which the market reverses its direction and corrects.

So the next time you see either a Spinning top or a Doji individually or in a cluster, remember there is indecision is the market. The market could swing either ways and you need to build a stance that adapts to the expected movement in the market.

Conclusion Of Spinning Top and Doji :

1. A spinning top has a small real body. The upper and lower shadows are almost equal in length

2. The colour of the spinning top does not matter. What matters is the fact that the open and close prices are very close to each other

3. Spinning tops conveys indecision in the market with both bulls and bears being in equal control

4. Spinning top at the top end of the rally indicates that either the bulls are taking a pause before they can resume the uptrend further or the bears are preparing to break the trend. In either case, the trader’s stance has to be cautious. If the trader’s intent is to buy, he is better off buying only half the quantity and he should wait for the markets to move in his direction

5. Spinning top at the bottom end of the rally indicates that either the bears are taking a pause before they can resume the down trend further or the bulls are preparing to break the trend and take the markets higher. Either case, the trader’s stance has to be cautious. If the traders intent is to buy, he is better off buying only half the quantity and he should wait for the markets to make the move

6. Doji’s are very similar to spinning tops. Doji also convey indecision in the market. By definition dojis do not have a real body. However in reality, even if a wafer thin body appears it is acceptable

7. A trader’s stance based on dojis is similar to stance taken when a spinning top occurs.

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Single Candlestick Patterns - Marubozu - Technical Analysis

As the name suggests, a single candlestick pattern is formed by just one candle. So as you can imagine, the trading signal is generated based on 1 day’s trading action. The trades based on a single candlestick pattern can be extremely profitable provided the pattern has been identified and executed correctly.

One needs to pay some attention to the length of the candle while trading based on candlestick patterns. The length signifies the range for the day. In general, the longer the candle, the more intense is the buying or selling activity. If the candles are short, it can be concluded that the trading action was subdued.

The following picture gives a perspective on the long/short – bullish, and bearish

candle.

The trades have to be qualified based on the length of the candle as well. One should avoid trading based on subdued short candles. We will understand this perspective as and when we learn about specific patterns.

Marubozu :

The Marubozu is the first single candlestick pattern that we will understand. The word Marubozu means “Bald” in Japanese. We will understand the context of the terminology soon. There are two types of marubozu – the bullish marubozu and the bearish marubozu.

Before we proceed, let us lay down the three important rules pertaining to candlesticks. We looked at it in the previous post ; I’ve reproduced the same for quick reference:

1. Buy strength and sell weakness

2. Be flexible with patterns (verify and quantify)

3. Look for prior trend

Marubozu is probably the only candlestick pattern which violates rule number 3 i.e look for prior trend. A Marubuzo can appear anywhere in the chart irrespective of the prior trend, the trading implication remains the same.

The text book defines Marubozu as a candlestick with no upper and lower shadow (therefore appearing bald). A Marubuzo has just the real body as shown below. However there are exceptions to this. We will look into these exceptions shortly.

The red candle represents the bearish marubuzo and the blue represents the bullish marubuzo.

Bullish Marubuzo :

The absence of the upper and lower shadow in a bullish marubuzo implies that the low is equal to the open and the high is equal to the close. Hence whenever the, Open = Low and High = close, a bullish marubuzo is formed.

A bullish marubuzo indicates that there is so much buying interest in the stock that the market participants were willing to buy the stock at every price point during the day, so much so that the stock closed near its high point for the day. It does not matter what the prior trend has been, the action on the marubuzo day suggests that the sentiment has changed and the stock in now bullish.

The expectation is that with this sudden change in sentiment there is a surge of bullishness and this bullish sentiment will continue over the next few trading sessions. Hence a trader should look at buying opportunities with the occurrence of a bullish marubuzo. The buy price should be around the closing price of the marubuzo.

In the chart above (ACC Limited), the encircled candle is a bullish marubuzo. Notice the bullish marubuzo candle does not have a visible upper and a lower shadow. The OHLC data for the candle is: Open = 971.8, High = 1030.2, Low = 970.1, Close = 1028.4

Please notice, as per the text book definition of a marubozu Open = Low, and High = Close. However in reality there is a minor variation to this definition. The variation in price is not much when measured in percentage terms, for example the variation between high and close is 1.8 which as a percentage of high is just 0.17%. This is where the 2nd rule applies – Be flexible, Quantify and Verify.

With this occurrence of a marubuzo the expectation has turned bullish and hence one would be a buyer of the stock. The trade setup for this would be as follows:

Buy Price = Around 1028.4 and Stoploss = 970.0

As it is evident, candlestick patterns do not give us a target. However we will address the issue of setting targets at a later stage in this blog .

Having decided to buy the stock, when do we actually buy the stock? The answer to this depends on your risk appetite. Let us assume there are two types of trader with different risk profiles – the risk taker and the risk averse.

The risk taker would buy the stock on the same day as the marubozu is being formed. However the trader needs to validate the occurrence of a marubozu. Validating is quite simple. Indian markets close at 3:30 PM. So, around 3:20 PM one needs to check if the current market price (CMP) is approximately equal to the high price for the day, and the opening price of the day is approximately equal to the low price the day. If this condition is satisfied, then you know the day is forming a marubozu and therefore you can buy the stock around the closing price. It is also very important to note that the risk taker is buying on a bullish/blue candle day, thereby following rule 1 i.e buy on strength and sell on weakness.

The risk averse trader would buy the stock on the next day i.e the day after the pattern has been formed. However before buying the trader needs to ensure that the day is a bullish day to comply with the rule number 1. This means the risk averse buyer can buy the stock only around the close of the day. The disadvantage of buying the next day is that the buy price is way above the suggested buy price, and therefore the stoploss is quite deep. However as a trade off the risk averse trader is buying only after doubly confirming that the bullishness is indeed established.

As per the ACC’s chart above, both the risk taker and the risk averse would have been profitable in their trades.

Here is another example (Asian Paints Ltd) where both the risk taker, and the risk averse trader would have been profitable.

Here is an example where the risk averse trader would have benefited :

Notice in the chart above, a bullish marubuzo has been encircled. The risk taker would have initiated a trade to buy the stock on the same day around the close, only to book a loss on the next day. However the risk averse would have avoided buying the stock entirely because the next day happened to be a red candle day. Going by the rule, we should buy only on a blue candle day and sell on a red candle day.

The Stoploss on Bullish Marubuzo :

What if after buying, the market reverses its direction and the trade goes wrong? Like I had mentioned earlier, candlestick patterns comes with a inbuilt risk management mechanism. In case of a bullish marubuzo, the low of the stock acts as a stoploss. So after you initiate a buy trade , in case the markets moves in the opposite direction, you should exit the stock if price breaches the low of the marubuzo.

Here is an example where the bullish marubuzo qualified as a buy for both the risk averse and the risk taker. The OHLC is : O = 960.2, H = 988.6, L = 959.85, C = 988.5.

But the pattern eventually failed and one would have booked a loss. The stoploss for this trade would be the low of marubuzo, i.e 959.85.

Booking a loss is a part of the game. Even a seasoned trader goes through this. However the best part of following the candlestick is that the losses are not allowed to run indefinitely. There is a clear agenda as to what price one has to get out of a trade provided the trade starts to move in the opposite direction. In this particular case booking a loss would have been the most prudent thing to do as the stock continued to go down.

Of course there could be instances where the stoploss gets triggered and you pull out of the trade. But the stock could reverse direction and start going up after you pulled out of the trade. But unfortunately this is also a part of the game and one cannot really help it. No matter what happens, the trader should stick to the rules and not find excuses to deviate from it.

Bearish Marubuzo :

Bearish Marubuzo indicates extreme bearishness. Here the open is equal to the high and close the is equal to low. Open = High, and Close = Low.

A bearish marubuzo indicates that there is so much selling pressure in the stock that the market participants actually sold at every price point during the day, so much so that the stock closed near its low point of the day. It does not matter what the prior trend has been, the action on the marubuzo day suggests that the sentiment has changed and the stock is now bearish.

The expectation is that this sudden change in sentiment will be carried forward over the next few trading sessions and hence one should look at shorting opportunities. The sell price should be around the closing price of the marubuzo.

In the chart above (BPCL Limited), the encircled candle indicates the presence of a bearish marubuzo. Notice the candle does not have an upper and a lower shadow. The OHLC data for the candle is as follows:

Open = 355.4, High = 356.0, Low = 341, Close = 341.7

As we had discussed earlier a minor variation between the OHLC figures leading to small upper and lower shadows is ok as long as it is within a reasonable limit.

The trade on the bearish marubuzo would be to short BPCL approximately at 341.7 with a stoploss at the high point of the candle. In this case the stoploss price is 356.0. Of course at this stage we still haven’t dealt with setting targets, and we will figure that out much later in this blog .

Do remember this, once a trade is initiated you should hold on to it until either the target is hit or the stoploss is breached. If you attempt to do something else before any one of these event triggers, then most likely your trade could go bust. So staying on course of the plan is extremely crucial.

Trade can be initiated based on the risk appetite of the person. The risk taker can initiate a short trade on the same day around the closing. Of course, he has to make sure that the candle is forming a bearish marubuzo. To do this at 3:20PM the trader has to confirm if the open is approximately equal to the high and the current market price is equal to the low price. If the condition is validated, then it is a bearish marubuzo and hence a short position can be initiated.

If the trader is risk averse, he can wait till the next day’s closing. The short trade will go through only by 3:20PM next day after ensuring that the day is a red candle day. This is also to ensure that we comply with 1st rule – Buy strength, and Sell weakness.

In the BPCL chart above, both risk taker and risk averse would have been profitable.

Here is another chart, Cipla Limited, where the bearish marubuzo has been profitable for both risk taker, and a risk averse trader. Remember these are short term trades and one needs to be quick in booking profits.

Here is a chart which show bearish marubuzo pattern which would have not worked out for the risk taker but a risk averse trader would have entirely avoided initiating the trade, thanks to rule 1.

The trade trap :

Earlier in this post we did discuss about the length of the candle. One should avoid trading during an extremely small (below 1% range) or long candle (above 10% range).

A small candle indicates subdued trading activity and hence it would be difficult to identify the direction of the trade. On the other hand a long candle indicates extreme activity. The problem with lengthy candles would be the placement of stoploss. The stoploss would be deep and in case the trade goes wrong the penalty to pay would be painful. For this reason, one should avoid trading on candles that are either too short or too long.

Conclusion Of Marubozu :

1. Remember the rules based on which candlesticks work

2. Marubuzo is the only pattern which violates rule number 3 i.e Look for prior trend

3. A bullish marubuzo indicates bullishness

          (I) Buy around the closing price of a bullish marubozu

          (II) Keep the low of the marubuzo as the stoploss

4. A bearish marubuzo indicates bearishness

          (I) Sell around the closing price of a bearish marubozu

          (II) Keep the high of the marubuzo as the stoploss

5. An aggressive trader can place the trade on the same day as the pattern forms

6. Risk averse traders can place the trade on the next day after ensuring that it obeys rule number 1 i.e Buy strength, and Sell weakness

7. An abnormal candle lengths should not be traded

(I) Short candle indicates subdued activity

(II) Long candle indicates extreme activity, however placing stoploss becomes an issue.

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